Signal Vs Noise

A very Sound advice from Jim Wyckoff, quite long time ago, but still valid

Trading buzzwords “patience” and “discipline” again come to mind when a market is pausing in a narrow-range, choppy and non-trending condition. This condition of the market is also called “market noise.” The majority of the time, most markets are in non-trending or choppy modes. Thus, if a trader does not have a good plan to deal with this type of market condition odds are very low that any trading success will ever be achieved.

Most trading professionals recommend that position traders ignore the day-to-day market noise, and instead focus on the bigger-picture perspective of the market. This can be accomplished in several ways. Examining longer-term price charts (weekly and monthly) is a good way to obtain that important bigger-picture perspective of a market and its trend.

Here’s another simple, yet effective way to help you filter out day-to-day price “noise” in a market you are trading: Set major support and resistance benchmarks on the shorter-term chart (usually a daily chart for position traders). These major price benchmarks can be weekly or monthly highs and lows, or spike highs and lows, or major psychological price levels (such as $15.00 in soybeans, or $7.00 in corn, or $1,700.00 in gold, or $95.00 in crude oil).

It’s a better idea to set these price benchmarks before you execute a trade and are in the heat of battle. Once you have established and duly noted these important shorter-term price benchmarks, then if prices do move above or below one of your benchmarks, that is a solid clue the price move is NOT just market “noise” and a bigger price trend is likely developing.

Sometimes if prices do move above or below major shorter-term price benchmarks, that is also considered a price “breakout” from a congestion area on the chart. This also suggests a stronger price move is possible in the direction of the price breakout.

Some traders may prudently ask, “Should I set my protective buy or sell stops near these major shorter-term price benchmarks?” That depends on the individual trader and how much capital he or she wants to risk on any given trade. For me, the major price benchmarks that I set for guideposts on any market are usually too far away from the price at which I’m filled (my market entry). In other words, I like to set protective stops at tighter levels than where my major price benchmarks are located.

Any time a trader can implement a strategy to better define or determine a market’s trend, or that will help the trader keep a better perspective on the market during the heat of trading that market, odds will be higher for trading success.

That’s it for now. Next time, we’ll focus on another topic on your road to trading success.